Greenspan Warns China Currency Peg Causes "Very Serious" Problems

Federal Reserve chief Alan Greenspan warned July 20 that China's policy of pegging its currency to the U.S. dollar could cause "very serious" problems for the giant Asian economy. Greenspan told the financial services committee of the House of Representatives that the Chinese authorities were aware of the weakness of their currency system and wanted to revalue the yuan.

Greenspan explained that it was in China's interest to allow its currency, pegged at 8.28 yuan to the dollar, "to move up." This, he said, was largely because financial operations that China uses to support its currency require the central bank to accumulate "very large" amounts of U.S. Treasury bonds. "Unless they sterilize that very substantial inflow, they create significant distortions in their financial system and ultimately (that) could be very serious for the Chinese economy," he said.

U.S. manufacturers contend that China's fixed currency system has undervalued the yuan by as much as 40%, making Chinese products cheaper in the domestic market and American goods more expensive in China. The U.S. trade deficit with China jumped to more than $160 billion last year, the highest ever with a single country.

China, which holds more than $230 billion in Treasury bonds and notes, has been sharply criticized by the U.S. and several other trade partners for allegedly keeping the yuan undervalued to give its exporters an unfair advantage. U.S. senators have held back a planned bill that would slap a hefty 27.5 % tariff on Chinese imports after assurances by Greenspan and administration officials that a yuan revaluation is coming.

"Anything we do which restrains world globalization at the end of the day rebounds, you understand, to our disadvantage," Greenspan said.